Investing in Cryptocurrencies With Your IRA — The Basics

Investing in Cryptocurrencies With Your IRA — The Basics

4 min read
Scott Smith

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real estate investors and entrepreneurs in all 50 states protect more than $1.2 billion in assets. Since 2014, he has published over 1,000 posts and articles on BiggerPockets and has appeared on hundreds of podcasts.

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Scott fell in love with real estate when his commercial property investment allowed him to graduate from Albany Law School debt-free. He immediately began practicing at the trial and appellate court with the district attorney, placing him in the top 1 percent of lawsuit attorneys in the county in terms of professional experiences. He also worked in private practice, suing insurance companies for denying valid claims (which is surprisingly common!).

After his friend lost $3 million in real estate from a single lawsuit, despite having ample insurance, Scott dedicated himself to educating real estate investors on the importance of affordable asset protection, specifically when it comes to folk knowledge and misconceptions that still exist in the investment and legal community. The solutions Scott recommends for his clients are the same ones he originally created for himself and has been refining on his mission to help people protect themselves from frivolous lawsuits.

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Scott regularly appears on shows with folks like Grant Cardone, BiggerPockets, Entrepreneurs on Fire, Wheelbarrow Profits, and his own real estate investing podcast. He frequently interviews industry experts on his Facebook and YouTube accounts and has published thousands of posts and articles on BiggerPockets and his blog for real estate investors.

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Scott graduated from Albany Law in 2014.

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He has passed both the Texas and New York bar exams.

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IRAs are your virtual nest-egg. They’re beloved by investors for the security they provide upon retirement. Lately, the news has been full of coverage — some good, some bad, and some straight-up confusing— about Bitcoin and other cryptocurrencies.

Some investors are even buzzing about self-directed Bitcoin IRAs and other “hot” new products. But before you can decide whether you want to start moving money out of your IRA and toward a cryptocurrency investment, it’s best to have some grasp of what cryptocurrency actually is.

In this article, we’re going to talk about Bitcoin, as it continues to be the most popular and best-known cryptocurrency at the time of this writing. Bitcoin uses blockchain technology to simultaneously anonymize and securely store your funds. If you just looked up the numbers and have decided that you want to buy Bitcoin, like, right now right now, take a deep breath. The last thing anyone wants to do is buy on the wrong side of a bubble. There’s been lively public debate about whether Bitcoin is, in fact, a bubble.

It’s no wonder investors are asking more and more questions about Bitcoin, since its value saw dramatic increases through 2016 and 2017. The most popular of these questions is whether it’s “real” money.

Is Bitcoin “Real” Money?

Bitcoin and other cryptocurrencies are definitely real money in the sense that you can spend them on all manner of goods and services. And they can also be held in your IRA. As a matter of fact, your IRA can hold nearly anything, with only  a few exceptions such as life insurance and collectables.

Related: Bitcoin or Real Estate: Which is the Better Investment?

Other Types of Cryptocurrency  

Bitcoin gets all the press, but other cryptocurrencies include Dogecoin (which is basically identical, from a technical standpoint, to Bitcoin), Ethereum, and LiteCoin.

Cryptocurrencies are taxed, just like any other type of income that makes its way into your IRA. The taxman even lends them validity, in his own way. The IRS has declared that cryptocurrencies are property, and as such, profits from sale are treated identically to capital gains. So yes, you can legally profit from this increasingly popular form of investment, but if you’re going to stick it in your IRA, you want to ensure that you do so correctly.

Setting Up an IRA That Accepts Cryptocurrency

This is going to be trickier than just shuffling around your traditional assets and cash, but many investors find it’s worth the effort. Just ensure that you’re taking all of these factors into consideration if you choose to use cryptocurrency with your IRA.

Ensure You’re Using The Right Type of IRA

In this case, you’re shooting for a self-directed IRA that permits the use of alternative assets. You should be able to research whether your current custodian is among those who offer the self-directed IRA. If not, start looking for a custodian who offers this product today. Once you’re self-directing, crypto investments are simple.

Transfer Assets Into Bitcoin

We’ll go into much more detail on exactly how this is done below, but the long and short of it is that once you have the correct type of IRA, all you need to do is make a contribution to it using Bitcoin. You’ll use more or less the same procedure that you would for a cash contribution, but first, you’re going to need to buy your first Bitcoin products.

Options for Buying Bitcoin for Your IRA

All of the options for converting cash or funds to Bitcoin involve using a wallet technology. Depending on the type of Smartphone you use, you should be able to find a reputable wallet app like Ethereum or Coinbase for this purpose.

The wallet essentially serves like your identifier for showing that you are the owner of the virtual currency. You can’t do much business with Bitcoin without a wallet — it’s also how you get paid by or pay someone else in Bitcoin.

Some third-party apps like Coinbase allow you to simply attach the business checking account from your LLC to the app-based wallet and transfer U.S. dollars into Bitcoin directly. This process can also be engaged in various online exchanges, where this is known as a USD-BTC (Bitcoin) transaction.

Related: Is This a Bitcoin Bubble? An In-Depth Look at the Bitcoin Phenomenon

There are also technologies that allow you to acquire Bitcoin by either buying it directly from another investor, or increasingly, using Bitcoin ATMs. Some websites have even enabled local transactions where investors meet up and perform a wallet-to-wallet transaction.

Bitcoin ATMs are booming where I live, in Austin, Texas. We have them all over the city. These are a slightly newer technology that were invented in response to demand for instant transfers from cash to Bitcoin. The machines are all a little bit different depending on vendor, but a quick internet search should help you figure out if there’s one near you. Typically, you will want to use a smartphone wallet like one of those mentioned above. The machine will associate your phone number with the transfer. You may need to bring ID — the law and business practices regulating this vary from state to state and machine to machine.

So, I hope that clears up any questions about whether Bitcoin and other cryptocurrencies are “real” money (or as it turns out, property) that can be used to fund your IRA or be used for other investment purposes. While the technology is certainly still evolving, the financial system is responding with more products to make cryptocurrency investment ever-simpler. Whether this is a good idea for you is a question for your advisors. As always, I’m happy to answer any questions you may have on the subject based on my experience as an attorney and fellow investor.

Have you invested with Bitcoin or other cryptocurrency?

Share your experience below!